Keys Ways that Delinquent Taxes Can Affect Your Trust Fund



When you owe back taxes to the IRS, you put any assets or income you possess at risk of being levied or seized. If you do not have money or property that the IRS can claim now, you could face a tax lien or seizure of your assets in the future if your financial status improves or if you receive an inheritance. Before you inherit money, you may prepare yourself financially by knowing how an IRS debt could impact any trust fund that has been established for you.

Tax Liens and Seizures

As noted, the IRS has the right to come after any property or money that you have or will inherit. Even if your tax debt is in a Currently Not Collectble status, the IRS will review your earnings once a year to determine if you have the money or assets to satisfy what you owe the government.

If you inherit money from a trust fund, the IRS could lay claim to some or all of the money and apply it toward what you owe. You may not be allowed to access the funds until the IRS deems your tax account resolved in the government's favor.

Ways to Avoid Trust Fund Seizures or Liens

When you want the IRS to leave your trust fund alone, you may consider other options for legally dealing with your tax debt. You may take advantage of these resolutions that the IRS makes available to you, such as:

  • Offer in Compromise, or OIC: This option lets you pay a lump sum to settle your tax debt. Your OIC must be reasonable and reflect the amount of money that you can realistically pay to resolve your account.
  • Monthly Installment Agreement: You can resolve your tax debt by making monthly payments on it. The IRS will allow you to make payments that are based on what you earn each month and what other expenses you must pay to support you and your family.
  • Payment in Full: If you can afford to pay off the entire debt before you inherit a trust fund, you should utilize this option even if it means liquidating some of your other assets. Bringing your tax debt to a zero balance is the best way to prevent the IRS from laying claim to your trust fund.

Choosing the Right Trust Fund

You may be able to avoid the IRS from attaching itself to your inheritance by choosing the right kind of trust fund for your money. If possible, you may suggest to the person or entity leaving you the money that the funds be put in a trust that prevents the money being seized by the IRS to satisfy your tax debt.

One of your options centers on having the money put in a spendthrift trust. With this type of trust, the trustee dispenses regular payments to you.

The IRS may not lay claim to the payments if you are already set up on a payment arrangement or if you have already made and satisfied an OIC. However, if you have not yet established a manner in which to resolve the debt, however, the IRS may put a lien on your spendthrift trust disbursements.

You also may request the funds be put in a discretionary trust fund. As its name implies, the money in the trust fund is subject to the discretion of the trustee.

Neither the trust fund's intended recipient or any creditor like the IRS can legally request money be dispensed from the trust. Any disbursements will be done so with the discretion of the fund's trustee.

A discretionary trust fund, then, could be the safest way to prevent an inheritance from being levied or seized by the IRS. The trustee could in theory retain the funds until the recipient's tax debt is resolved or dismissed. Alternatively, the trustee has the option of using the funds to pay the recipient's tax debt in full and then releasing the remaining money to the heir or heiress.

The IRS can legally attach itself to any inheritance you are set to receive in order to settle your tax debt. You can use these options for safeguarding any funds you will receive from a trust fund.